With Apple, Google And Pandora, On-Demand Music Market Goes Sideways

With new developments from
Apple,
Google, and
Pandora, the market for on-demand music is going through yet another phase in its 14-year history. The involvement of these industry heavyweights indicates that there's room for growth in on-demand music. But the market isn't moving in the direction of consolidation, as some have predicted. Instead, it's moving sideways.

Pandora is the latest streaming service to attract attention, as it bought Rdio for $75 million earlier this month. (AP Photo/Richard Drew)

Perhaps the most important of the several recent developments is Google's shift in strategy around the use of YouTube for music. For users, the best thing about YouTube has always been its huge library of content. Since 2011, when the major recording companies completed their agreements to allow almost all of their content to go on YouTube in exchange for a share of ad revenue, YouTube has been the go-to place for music that you know you want to hear. It's the place where you can be confident (with a few exceptions, such as The Beatles) that you're going to find a certain song, particularly if you aren't picky about whether it's the official version or not -- in part because the odds are overwhelming that some user, somewhere, has uploaded it there, even if the label hasn't.

The fact is that YouTube is several times more popular, specifically for music listening, than all other on-demand music services combined. However, as a well-organized music exploration and discovery service, it leaves a lot to be desired.

At the same time, Google also operates Google Play Music, which is a combination of a $10-a-month on-demand music subscription service, Internet radio, a paid download service a la iTunes or Amazon MP3, and an app for managing your own personal MP3 library. Although Google Play Music has few features that competitors like Spotify and iTunes don't also have, it's a well-organized music app (and it even runs on iOS devices).

The sum total of all this is not exactly a coherent music offering, and Google has been wrestling with this for some time now. It has primarily been focusing on how to make YouTube into a truly compelling music destination. A year ago, it launched YouTube Music Key, a paid-subscription service that would give users a "pure" music experience on YouTube without ads. It tried merging subscription Google Play Music accounts with YouTube Music Key accounts. This didn't generate much interest, and the fact that Google hardly bothered to market it at all didn't help.

Now Google is trying a different strategy. Last month it launched YouTube Red, a paid subscription ad-free video service. Subscribers to Google Play Music automatically got YouTube Red subscriptions. Then Google decided to ditch YouTube Music Key in favor of the more simply-named YouTube Music.

YouTube Music has two flavors. The free version is essentially standard YouTube with search results focused on music as well as music-oriented recommendations. But if you're a YouTube Red subscriber, then you get some additional features with YouTube Music: There are no ads, and it lets you save songs for offline listening (as all other paid on-demand music services do). It also lets you listen to the audio while using other apps on your phone or tablet; standard YouTube pauses the video when you switch apps.

If you think this is all a bit confusing, you are not alone. It follows Google's propensity for clever yet over-engineered consumer media experiences; other examples of this include Google TV (which failed in 2011) and Chromecast (whose actual usage among purchasers has been said to be declining ). Furthermore, YouTube Music doesn't really add or change much in the way of music management or discovery features; it's the same old YouTube underneath. And even though a single price gets you both paid services, Google is still offering several distinct on-demand music experiences: YouTube (free), YouTube Music, YouTube Red, and Google Play Music.

Apple Music for Android is not quite ready for prime time: It suffers from a needlessly complex signup process as well as stability issues and a few user interface glitches. But it could be described as a nicer-looking, cleaned-up version of Beats Music -- which, for my money, is the best all-around on-demand music service today. Its combination of search and browse features with expert-curated playlists, very good audio quality and just enough social features is distinctive. Although Apple hasn't blasted the on-demand music market wide open (the way Spotify did back in 2009 when it introduced a free tier), it is enjoying solid and growing subscribership, which I would estimate at about 2.5 million in the U.S.; this puts it roughly even with Google Play Music and Rhapsody but way behind Spotify.

The final recent development in the on-demand music market comes from Pandora, the Internet radio giant. Although Pandora's official position for years was that it had no intention of adding on-demand features, all of the major on-demand services were adding Internet radio; so it was just a matter of time until Pandora did the converse.

Rdio is a small service that has never managed to grow much of a subscriber base despite a comparatively large marketing budget that has led many in the press to overstate its importance relative to its actual market share. Rdio guards its subscribership figures closely, which only adds to speculation that they are small; estimates generally put it at less than half a million. At the same time, Rdio is admired for its design and abundance of social features.

All of this makes Rdio an attractive acquisition candidate -- at the right price -- and Rdio was known to have been up for sale for some time. Pandora agreed to pay $75 million in what amounts to an asset sale; terms of the deal require that Rdio go through bankruptcy proceedings before Pandora can acquire the assets. That price seems quite high given Rdio's suspected subscribership.

The deal will give Pandora the infrastructure to launch an on-demand music service and market it to its enormous base of registered users. Currently about 5% of Pandora's users already pay $5/month for Pandora One, Pandora's ad-free, unlimited-skip Internet radio service -- which is several times Rdio's subscribership, if the estimates are correct. It remains to be seen whether Pandora will attempt to integrate on-demand music into its core Internet radio service -- which is a difficult thing to do without tricky user experience issues -- or launch a separate product.

Large numbers of music fans are finally getting comfortable with the idea of spending $10 per month for on-demand access to a library of tens of millions of tracks. Yet the core on-demand functionalities of Spotify, Rhapsody, Google Play Music, Apple Music, Deezer, Rdio, Tidal, and various others are essentially the same. Therefore one would expect that the market will consolidate around one or two leaders and the rest will fade away.

Such a shakeout occurred in the mid-2000s before Spotify disrupted it with its freemium model; Virgin Digital Music Club, MusicMatch On Demand, Yahoo Music Unlimited, and a few other similar services dropped out. It's only a matter of time before a similar shakeout happens again and the market, freed from confusion and fragmentation, grows even bigger. Yet the past month's developments in the on-demand music market don't seem to get us closer to this eventuality. Instead, they just move the market sideways.

Bill Rosenblatt runs GiantSteps Media Technology Strategies, a consultancy that focuses on digital media technology, business models, and copyright. Check him out on LinkedIn or Twitter.

I am the founder of GiantSteps Media Technology Strategies, a consulting firm whose clients include content providers and digital media technology companies ranging from early stage startups to Global 500, as well as public policy entities related to copyright in the digita...